commercial property to residential - vat

can the vat on the purchase of the property be reclaimed if the property is being made into flats

Didn't find your answer?

Hi everyone

I have looked and dont seem to be finding the answer - A client who usually buys building plots and builds new homes has the opportunity to buy a large commercial building that would be changed into residential apartments. I am aware to the 5% charge of VAT on building works ect but can the buyer (ltd co and VAT registered) reclaim the vat on the purchase of the building?

thanks for any help, pointing in the right direction

 

Replies (7)

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By The Dullard
07th Jan 2022 15:49

Well, the purchaser can get the seller to disapply the option using VAT Form 1614 before purchase. That improves cashflow and saves SDLT.

If this question is in relation to a building that has been purchased and the flats will be sold (a zero-rated supply), then the VAT on purchase can be recovered, as can any VAT incurred on conversion.

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Replying to The Dullard:
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By sarahtaylor2018
07th Jan 2022 15:56

thank you, I will put it to my client to ask about the form but if its a deal breaker my clients cashflow will be ok before the vat refund. thank you for taking the time to answer its much appreciated - its what I thought but being a sole trader sometimes its nice to "chat" about things.

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Replying to sarahtaylor2018:
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By Wanderer
07th Jan 2022 16:18

Just expanding on the point that The Dullard has made make sure you determine what the client is intending to do with the flats. If they rent them out the VAT consequences are likely to be different.
p.s. I fall long short of being a VAT expert so if there's any chance of letting the flats out come back here for someone else to point you further in the right direction.

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VAT
By Jason Croke
07th Jan 2022 16:35

The right to reclaim VAT is always on the basis that you make a taxable sale. Any question about "can I reclaim VAT" can only be answered by knowing what the VAT status of the eventual sale will be.

When your client normally buys land and builds new homes, the sale of new homes are zero rated and so your client is making a taxable sale and this triggers the right to reclaim VAT on expenditure. Remember, zero rate is a rate of VAT, it is not "no VAT".

On the flipside, if your client only ever bought old houses and refurbished them and sold them on, the sale of an existing dwelling is exempt, so your client would not be able to register for VAT or reclaim it as they are not making a taxable sale.

So to your query, client is buying a commercial property, seller will charge VAT*. Your client intends to convert into dwellings - but you don't mention what they intend to do with the apartments, will they sell them, rent them or a bit of both?

Lets say they sell them, these are new dwellings (as they didn't exist before) and the sale of them will be zero rated, your client can reclaim all their input tax including the VAT on buying the property.

Lets say they want to rent them all out, rental of dwellings is exempt, your client is not making a taxable supply and so they cannot reclaim any VAT on the acquisition of the property or any of the conversion costs (but the conversion costs will be at 5% and so not such a hit).

If your client sells some and rents some, then they will be partially exempt and there may be a restriction on the input tax they can reclaim in relation to the purchase of the property and the conversion costs.

*it may also be possible to ask the seller to disapply their option to tax by issuing a VAT1614D and avoid VAT altogether on the purchase (which will also mean a lower SDLT to pay), but there are conditions attached to that, see para 3.4 https://www.gov.uk/guidance/opting-to-tax-land-and-buildings-notice-742a...

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Replying to Jason Croke:
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By sarahtaylor2018
07th Jan 2022 16:59

Thank you, my client intends to sell them

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Replying to sarahtaylor2018:
VAT
By Jason Croke
07th Jan 2022 17:14

Thanks for confirming, but just be mindful that intention can change (ie, banking crisis in 2008 saw banks not lending and people unable to afford homes), so if your client converts and then end up renting, that could lead to a repayment of previously reclaimed VAT back to HMRC.

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Replying to Jason Croke:
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By Winnie Wiggleroom
09th Jan 2022 06:04

Jason Croke wrote:

Thanks for confirming, but just be mindful that intention can change (ie, banking crisis in 2008 saw banks not lending and people unable to afford homes), so if your client converts and then end up renting, that could lead to a repayment of previously reclaimed VAT back to HMRC.

Just one of the reasons we use SPVs as a subsidiary in this situation

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